Saturday
August 27, 2016

Builders Shy Away From Starter Homes

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Builders Shy Away From Starter Homes

There may be demand for starter homes, but many homebuilders aren’t interested in building them. Entry-level new homes are becoming scarce, and are unlikely to see any rises in the future, according to a BUILDER Online article.

Vanishing Supply?

First-Time Buyers Stuck as Entry-Level Homes Dry Up

Indeed, the median new-home price entering 2015 was well over $280,000 – far from what many would consider an "entry-level" home.

"Entry-level refers to a price-brand at the lowest end of the home price spectrum; a true entry-level home lowers the barrier to entry to home ownership, typically for a renter to move into a home he or she owns," the article states.

Here’s why the starter home is losing traction among those in the building industry:

  • Land costs are high, and many of the lots during the first part of the housing recovery in the last three years have been mostly finished lots of "A" quality – with little attention devoted to B, C, and D lots that would be more geared toward entry-level homes. "Lots that could be programmed for entry-level or starter homes would--in a typical recovery cycle--involve high-density (attached) or outer-circumference tracts," the BUILDER article explains. "Costs of lots in those two areas--and relief on some gnarly construction defects litigation trends on attached homes--need to come down measurably for there to be a return of entry level housing."
  • The higher fees in building such communities also may also deter entry-level buyers to the new-home market in general. In building these communities, builders often face significant infrastructure and expanded support service costs. As such, these fees and charges often must get added on to the price of a new home, which could add an extra 20 percent to 25 percent of the cost of a new home.
  • The typical "entry-level" buyer may not want a "starter" home any longer. "They’ve waited longer to form households, pay down student debt, hook up with significant others, and amass their ‘ability to repay’ profile, and now they’re not going to settle for a mere deed that gets them a ticket out of monthly rental payments," the article states.

The "starter" home may be moving to extinction. The idea of a home purchase that serves as the first step before buying a more permanent family residence may be fading as more entry level buyers start to favor stepping into their permanent residence from the start.

Source: "The Rise and Fall of the Entry-Level Home," BUILDER Online (Feb. 9, 2015)